On Wednesday, the Australian dollar (AUD) rallied following the release of higher-than-expected inflation data. The core measure of inflation remained above 4%, while headline annual inflation slowed to 3.6%. The consumer price index (CPI) for the first quarter showed a reading of 3.5% in March, surpassing the consensus estimate of 3.4%.
Following the CPI announcement, the Australian two-year swap rate rose by around 15 basis points to reach its highest level since November 2023 at 4.51%. Market expectations for monetary policy have shifted, with the Overnight Index Swap (OIS ) curve now indicates a lower probability of a rate cut by year-end, leaving just 8 basis points of easing ahead of the December meeting.
In a note on Wednesday, ING analyst Francesco Pesole said that while the risks of another rate hike are not entirely negligible, inflation numbers were likely insufficient to justify such a policy turnaround.
‘We believe the Reserve Bank of Australia can achieve its inflation target without having to raise rates again, but may still need to absorb some inflation increases, suggesting further steps towards easing communications with more caution will be taken’ Pesol said.
Recent economic data has been supportive of the Australian dollar, which has risen above 0.6500. While the currency remains sensitive to shifts in market sentiment, delayed expectations of policy easing and the ability to maintain support in a stable risk environment strengthen the AUD’s position.
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